Tech Mahindra surprises on non-BT revenues, margins

While the results are decent, they may not lead to a rally in Tech Mahindra’s shares, considering that they have already risen sharply since mid-2012. Photo: Hemant Mishra/Mint

Updated: Wed, Feb 06 2013. 10 26 PM IST

Tech Mahindra Ltd reported decent results for the December quarter, supporting investors’ view that the firm’s performance is steadily improving. Stripped of acquisitions, revenue was flat at $286 million (around Rs.1,520 crore today) and operating profit margin inched up by 32 basis points.

While this looks far from impressive, it must be noted that revenue from the company’s largest client, BT Group Plc, continues to decline. It fell by 3.25% sequentially last quarter, which means that revenue from non-BT clients rose by 2%, which is decent considering that the December quarter has traditionally been a soft quarter.

Also, Tech Mahindra has been in the process of transitioning two large projects onto its books, and during this period costs are recorded even though revenue is still to accrue. Additionally, last quarter’s results included the full impact of the acquisition of a captive business process outsourcing unit called Hutchison Global Services Pvt. Ltd and 19 days’ worth revenue of Comviva Technologies Ltd. These acquisitions were expected to dilute overall margins.

The fact that the margin rose marginally despite these has come as a positive surprise. For instance, Kotak Institutional Equities had factored in a 130 basis points decline in margins. The main reason for the increase in profit margin is a 200 basis points improvement in employee utilization, on the back of a continued rationalization in the company’s employee base. The broker had also expected organic revenue to decline by 2.3%—the company reported flat revenue.

Tech Mahindra’s shares have risen by over 50% in the past year, easily outperforming peers thanks to a steady improvement in margins as well as the outlook for revenue growth. While revenue from BT continues to decline, business from non-BT clients has increased. The company also made two relatively large acquisitions last year and announced some large deal wins, which will start getting reflected in its revenue in much greater measure this year.

All this will reduce its dependence on BT further. Already it has dropped from 44% two years ago to around 27% (assuming the full impact of the Comviva acquisition). Additionally, subsidiary Mahindra Satyam’s business has been growing well and profit margins of both companies have risen steadily.

All told, while the results are decent, they may not lead to a rally in Tech Mahindra’s shares, considering that they have already risen sharply since mid-2012.